So, now before I pay any of my payments, instead of owing $375,000 at the end of the very first month I owe $376,718. Now, I'm an excellent person, I'm not going to default on my home mortgage so I make that first mortgage payment that we computed, that we calculated right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, remember, I started with $125,000 of equity. After paying one loan balance, after, after my first payment I now have $125,410 in equity. So, my equity has actually gone up by exactly $410. Now, you're probably saying, hey, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only increased by $410,000.
So, that really, in the beginning, your payment, your $2,000 payment is primarily interest. Only $410 of it is principal. However as you, and then you, and after that, so as your loan balance decreases you're going to pay less interest here therefore each of your payments are going to be more weighted towards principal and less weighted towards interest.
This is your brand-new prepayment balance. I pay my home loan again. This is my brand-new loan balance. And notice, currently by month 2, $2.00 more went to principal and $2.00 less went to interest. And over the course of 360 months you're visiting that it's a real, large difference.
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This is the interest and principal portions of our home mortgage payment. So, this whole height right here, this is, let me scroll down a little bit, this is by month. So, this entire height, if you notice, this is the specific, this is precisely our home mortgage payment, this $2,129. Now, on that really first month you saw that of my $2,100 just $400 of it, this is the $400, just $400 of it went to actually pay down the principal, the real loan quantity.
The majority of it chose the interest of the month. But as I start paying down the loan, as the loan balance gets smaller and smaller sized, each of my payments, there's less interest to pay, let me do a better color than that. There is less interest, let's state if we head out here, this is month 198, over there, that last month there was less interest so more of my $2,100 actually goes to pay off the loan.
Now, the last thing I want to talk about in this video without making it too long is this concept of a interest tax reduction (how do 2nd mortgages work). So, a great deal of times you'll hear monetary organizers or realtors inform you, hey, the advantage of buying your home is that it, it's, it has tax benefits, and it does.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I want to be extremely clear with what deductible methods. So, let's for circumstances, speak about the interest charges. So, this whole time over thirty years I am paying $2,100 a month or $2,129.29 a month. Now, at the beginning a lot of that is interest.
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That $1,700 is tax-deductible. Now, as we go further and further each month I get a smaller and smaller sized tax-deductible part of my real mortgage payment. Out here the tax reduction is actually extremely little. As I'm preparing yourself to pay off my entire home mortgage and get the title of my home.
This doesn't suggest, let's state that, let's state in one year, let's state in one year I paid, I do not understand, I'm going to make up a number, I didn't compute it on the spreadsheet. Let's say in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest. how do mortgages work.
And, however let's say $10,000 went to interest. To say this deductible, and let's state before this, let's say prior to this I was making $100,000. Let's put the loan aside, let's state I was making $100,000 a year and let's state I was paying roughly 35 percent on that $100,000.
Let's say, you know, if I didn't have this home mortgage I would pay 35 percent taxes which would have to do with $35,000 in taxes for that year. Just, this is simply a rough quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not mean that I can just take it from the $35,000 that I would have normally owed and only paid $25,000.
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So, when I inform the Internal Revenue Service how much did I make this year, instead of saying, I made $100,000 I state that I made $90,000 due to the fact that I had the ability to deduct this, not directly from my https://www.openlearning.com/u/grisel-qfl9ur/blog/H1StyleclearbothIdcontentsection0HowDoArmMortgagesWorkCanBeFunForAnyoneh1/ taxes, I was able to deduct it from my earnings. So, now if I just made $90,000 and I, and this is I'm doing a gross oversimplification of how taxes really get calculated.
Let's get the calculator. So, 90 times.35 is equivalent to $31,500. So, this will amount to $31,500, put a comma here, $31,500. So, off of a $10,000 reduction, $10,000 of deductible interest, I essentially saved $3,500. I did not save $10,000. So, another way to think of it if I paid $10,000 interest, I'm going to, and my tax rate is 35 percent, I'm going to conserve 35 percent of this in actual taxes.
You're deducting it from the earnings that you report to the Internal Revenue Service. If there's something that you could really take straight from your taxes, that's called a tax credit - how mortgages work. So, if you were, uh, if there was some special thing that you could really subtract it straight from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I just wish to show you that I actually determined because month just how much of a tax reduction do you get. So, for example, simply off of the very first month you paid $1,700 in interest of your $2,100 home mortgage payment. So, 35 percent of that, and I got the 35 percent as one of your presumptions, 35 percent of $1,700.
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So, approximately over the course of the very first year I'm going to save about $7,000 in taxes, so that's absolutely nothing, absolutely nothing to sneeze at. Anyway, hopefully you found this handy and I encourage you to go to that spreadsheet and, uh, have fun with the assumptions, just the presumptions in this brown color unless you actually know what you're doing with the spreadsheet.
What I wish to make with this video is describe what a home mortgage is however I think the majority of us have a least a general sense of it. can a lawyer get you out of a timeshare But even much better than that actually go into the numbers and comprehend a little bit of what you are in fact doing when you're paying a home loan, what it's comprised of and how much of it is interest versus just how much of it is actually paying for the loan - how do reverse mortgages work example.